It's smart to diversify your portfolio with a selection of
international stocks. Among those, emerging-market stocks hold
the greatest growth potential. And the simplest way to own a
broad swath of high-growth foreign stocks is through an
Exchange-traded funds, commonly known as ETFs, are similar to
mutual funds in that they contain a bunch of different
securities. They're also like stocks in that you can buy and sell
them by the share at any time during the trading day.
So which emerging-market ETF is best for you?
What not to look for
The worst way to find the best emerging-market ETF is to look
for one that has performed the best lately. The
Market Vectors Egypt ETF
is a good example: While it has surged about 60% over the
past year, a closer look will reveal a 52% drop in 2011, which
shows that it's a volatile holding. A glance at recent world
news, meanwhile, will remind you that Egypt isn't a politically
stable country at the moment, and indeed, much of the Middle East
is in turmoil. Too often, misguided investors are drawn to stocks
or funds that have soared recently. It's important to remember
that they can drop back down in short order, especially if
they've gotten ahead of themselves.
It's not safe to look for a high average annual gain over the
past few years, either, as the ETF may have had a single
blockbuster year that boosted its average return considerably.
Vanguard FTSE Emerging Markets ETF
, for example, surged 75% in 2009 -- a feat it's unlikely to
repeat often -- while it lost value in 2011 and 2013.
Emerging-market ETFs tend to be quite volatile -- some more than
others. But that's not necessarily a problem, so long as you're
prepared for that volatility and don't expect every year to offer
What to look for
Fees are a major consideration, as they can make a big
difference in your performance. The folks at
list 88 emerging-market ETFs with expense ratios (i.e., annual
fees) ranging from 0.14% to 1.29%. If you pay an extra percentage
point in fees, that reduces your returns by an entire percentage
point, which adds up over time.
You can also look into the recent holdings of various ETFs at
sites such as Morningstar.com. If you favor established large-cap
companies over small up-and-comers, for example, the
Schwab Emerging Markets Equity ETF
holds roughly 600 securities, mostly large-cap companies.
(It also boasts the lowest expense ratio, at 0.14%.) You can
focus on particular regions, too, without being specific to a
single country. The
iShares Asia 50 ETF
, for example, offers instant access to about 50 Asia-based
companies. You can also peek inside broad emerging-market ETFs to
see how their assets are allocated to various regions. That way,
if you're not confident in one region's future, you can decrease
your exposure to it.
If you seek dividend income from your emerging-market ETF,
yields recently ranged from zero to nearly 5%. The
iShares Emerging Markets Dividend ETF
yields about 4.6% -- but it has underperformed the average
emerging-market ETF over its short life of less than two years.
That's not necessarily a deal-breaker, but it's worth noting.
(Note, too, that its lower return is offset significantly by its
Consider the size of any ETF you look at, too. When an ETF is
fairly small -- i.e., when its assets total a few hundred million
dollars or less -- beware of potentially
between its bid and ask prices. Consider using a limit order if
you want to buy in.
A fine contender
So what's the best emerging-market ETF for you? That will
depend on your needs and preferences. One ETF you should consider
is the Vanguard FTSE Emerging Markets ETF. For one thing, it
offers one of the lowest expense ratios around, at 0.15%. That's
a big advantage over competing ETFs, as it lets you keep nearly
all your gains. Its dividend yield, recently near 2.5%, is much
more substantial than the puny payouts of some peers. If you're
looking for broad global representation and are most hopeful
about Asia's growth prospects, this ETF again fits the bill. It
has more than 900 holdings distributed around the world, with
nearly 60% of its assets in Asia and roughly 20% apiece in Europe
and the Americas. Most of its holdings are large-cap companies,
too, offering some ballast. The ETF's future counts much more
than its past, but it has outperformed most of its peers in its
lifetime. For long-term investors who are looking to diversify
their portfolios and can stomach some volatility, this Vanguard
ETF is a promising buy.
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The Best Emerging-Market ETF for You
originally appeared on Fool.com.
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